RBS CEO Hester Bowed to Board Decision That He Resign Before IPO

Stephen Hester, outgoing chief executive officer of the Royal Bank of Scotland Group Plc, is resigning after shrinking the balance sheet by about 900 billion pounds ($1.4 trillion) and cutting more than 36,000 jobs since he took over from Fred Goodwin amid the bank’s bailout in 2008 and 2009. Photographer: Simon Dawson/Bloomberg

June 13 (Bloomberg) -- Royal Bank of Scotland Group Plc
Chief Executive Officer Stephen Hester was persuaded to step
down by the board amid a decision from the U.K. Treasury to
privatize the lender by the end of 2014.

After almost five years in the job, Hester said yesterday
he was leaving by the end of the year at the board’s request to
enable a successor to be in place when the government starts
selling its 81 percent stake. His departure may make an initial
public offering more difficult, analysts and investors said.

“I was prepared to carry on through the start of
privatization,” Hester, 52, said on a call with reporters
yesterday. “This was the board’s decision, not mine, but I am
comfortable with their decision.”

Hester is resigning after shrinking the balance sheet by
about 900 billion pounds ($1.4 trillion) and cutting more than
36,000 jobs since he took over from Fred Goodwin amid the bank’s
bailout in 2008 and 2009. The government is seeking to recoup
some of its 45.5 billion-pound investment in Edinburgh-based RBS
before the next election slated for 2015.

“The acceleration of considering succession for the CEO
role arises from the Treasury’s determination to see the bank is
in a state that it can be returned to the private sector by the
end of 2014,” Chairman Philip Hampton, 59, said on the call.
“The board very much wants this to be returned to the private
sector as soon as is sensibly possible.”

The shares fell 0.6 percent to 325.6 pence in London
trading, below the 407 pence a share the government sees as the
break-even price on its investment. That leaves the U.K.
government sitting on a 7.4 billion-pound paper loss.

Hester’s Successor

“I want to commend Stephen Hester for everything he has
done to make this turnaround possible,” Chancellor of the
Exchequer George Osborne said in a statement yesterday. “Having
brought RBS back from the brink, now is the time to move on from
the rescue phase to focus on RBS being a U.K. bank that provides
greater support to the British economy.”

Hampton will lead a search for a CEO successor and will
consider both internal and external candidates, the bank said.
It may be difficult to find a replacement given the political
interference in how it is run, said Crispin Odey, whose London-based Odey Asset Management LLP oversees $9.5 billion.

“The real problem for the government is that they’ve made
the job look so unattractive that I can’t imagine who they are
going to fill it with,” said Odey, who said he sold his RBS
shares because of government meddling in the bank.

The bank said in February it would sell a stake in Citizens
Financial Group Inc., the U.S. consumer and commercial lender it
acquired in 1988, and further pare back its profitable
investment-banking unit after coming under pressure from the
government and regulators.

Pay Package

Hester’s resignation comes little more than a month after
RBS’s Chief Financial Officer Bruce Van Saun said he was
stepping down to run Citizens.

“Coming after Bruce’s departure this leaves an even
greater element of unhelpful uncertainty at the top,” said Ian
Gordon, an analyst at Investec Plc in London, who recommends
selling the shares. “That will harm the restructuring of the
business. He will be a loss for the group.”

Hester will be paid 1.6 million pounds, representing 12
months of pay and benefits and won’t get a bonus for 2013, the
bank said in a statement yesterday. He may also receive as much
as 4 million pounds of shares as part of a long-term incentive
plan, the bank said.

RBS’s shares have gained 0.3 percent this year, the second
worst performer among U.K. banks. Lloyds Banking Group Plc, the
other U.K. government assisted lender, has gained almost 26
percent in the period. London-based Lloyds shares fell 1.3
percent to 60.4 pence yesterday, just below the 61 pence break-even price the government uses.

Profit Declines

Operating profit at RBS declined 29 percent to 829 million
pounds in the first quarter, below the 1.2 billion-pound
estimate of six analysts in a Bloomberg survey, the bank said on
May 3. In contrast, Lloyds’s first-quarter pretax profit before
exceptional items rose almost threefold to 1.48 billion pounds
from 497 million pounds a year earlier, beating the 1.03
billion-pound median estimate of nine analysts surveyed by
Bloomberg, the bank reported on April 30.

Hester said last month that he saw a “cogent” case for
the government to start selling its RBS stake, even at an
initial loss. The average price the taxpayer would achieve for
the entire holding in RBS would be higher than the government’s
rescue price, he said.

Hester oversaw the bank’s IPO of Direct Line Insurance
Group Plc in October, selling about 30 percent of the insurer
and raising 787 million pounds in a deal forced by European
Union regulators after receiving state aid.